New research shows that, since 2010, “green” stocks – those of companies with a low carbon footprint – have outperformed “brown” stocks. That may have been caused by increased demand from investors pursuing an ESG mandate, which means the effect is temporary and brown stocks now have higher expected returns.
There has been an explosion in academic research on the impact of implementing ESG on the risk and returns of equity portfolios. Research on fixed income, which has received less attention, shows that positive ESG scores correlate with lower yield spreads, decreasing future returns for bond investors.
Theory predicts and research has shown that positive ESG scores correlate with a lower cost of capital for companies, lowering the expected return on stocks. New research shows a similar effect in the bond market, with positive ESG scores correlated to smaller credit spreads, decreasing the yield to investors.
A fast-growing stock – what clients believe is the next Google – is likely to be a disappointing investment. New research, which validates the theory of behavioral economics, shows that “representativeness” explains why clients overweight stocks with high asset growth.
Investing based on ESG concerns should lead to lower returns, since the prices of those stocks will be bid up beyond their intrinsic value. But new research shows that by combining ESG- and momentum-based principles, investors can achieve higher risk-adjusted returns.
New research shows that hedge funds that proclaim to adhere to socially responsible investment principles fail to follow through on that commitment and they deliver inferior performance results. The same is true of institutional funds, although the evidence is weaker.
Advisors are well aware of the perils of chasing performance, especially when assets become clearly overvalued. New research, based on a variation of Robert Shiller’s CAPE ratio, shows that this is true at the country level.
New research shows that higher employee satisfaction leads to higher equity returns. That reinforces previous research showing that ESG principles should be an important aspect of advisors’ due diligence in fund selection.
A goal of environmental, governance and sustainable (ESG) investing is to reduce carbon emissions and improve the quality of the environment. New research shows this effort is succeeding.
Liquidity is valuable to investors. Therefore, they should demand higher expected return (a risk premium) for less liquid stocks. But new research shows they have not earned that extra return in public equity markets.
Over the last two weeks, we have seen how a cadre of retail traders on Reddit can lay siege on a group of hedge funds that had shorted the stock of the retail company GameStop. We saw the price of GameStop rise from about $20 at the beginning of the year to a peak of $347.5 on January 27. Yesterday, on February 4, it closed at $53.50. This is a brick-and-mortar company that sells video games and lost about $20 million last year. Today we will explore deeper issues surrounding the GameStop saga.
Factor-based models are often criticized for data mining. One way to address that charge is with “out-of-sample” testing over longer time frames. But that takes time. New research provides an alternative out-of-sample test – using emerging-market bonds.
When companies take positive ESG steps, they attract asset flows from fund managers, according to new research. But the price spikes from those flows may not result in outperformance for long-term investors.
The explosive rally in GameStop, pitting retail investors against hedge funds, has renewed calls to ban short selling. But new research shows how valuable short sellers are to the efficient functioning of markets.
It has been my tradition to informally rate the investment-related books I read in the past year. I have also included some novels and books of general interest. Here is my list of winners and losers.
Calls for fiscal stimulus measures to target infrastructure are growing. But new research shows that infrastructure investments have offered few benefits to investors.
The competition to find superior models is what advances our understanding not only of the markets but also about which factors to focus on when selecting the most appropriate investment vehicles and developing portfolios.
Every January, I start keeping track of the predictions for the upcoming year I hear in the financial media and from advisors and investors. With the arrival of 2021, it’s time for my final review of how the 2020 forecasts played out.
Bonds with the same S&P or Moody’s credit rating can vary greatly in terms of their risk and subsequent return. New research show that fixed income investors must also consider their credit spreads.
The performance of ESG funds has been unimpressive, according to new research, and the occasional outperformance is driven mainly by funds’ expenses, exposures to certain industries and factors.
Given that we have entered a recession, should investors cut their equity allocation? Or move to larger stocks with good financial health?
Given their small size, narrow focus and high degree of specialization, it is reasonable to expect that active sector funds generate alpha. New research shows this is the case – but with a lot of caveats.
Investors may choose a passive fund because they don’t believe they can distinguish between luck and skill among active fund managers. But new research shows that the issue of luck and skill plays an important role in passive fund returns too.
The financial health of state pension plans has worsened and advisors should avoid municipal bonds from certain issuers.
Small-cap stocks have underperformed the broader markets since the “discovery” of the size premium in 1981. But research shows that a segment of those small-cap stocks have performed well and that now is a compelling time to invest in them.
The data used to construct ESG portfolios differs widely among providers, meaning that funds may not be aligned with your clients’ objectives and beliefs.
The top-heavy outperformance of the FAANG stocks is not a historical anomaly, but history shows that they are likely to be tomorrow’s underperformers.
Evidence from the field of behavioral finance suggests investors can’t handle the truth – many delude themselves about their own skills and performance. The ability to delude oneself leads to persistent and costly investment mistakes.
What happens in Vegas, doesn’t stay in Vegas; it makes its way to Wall Street. New research shows that gamblers who profit from football betting invest more heavily in lottery-like stocks.
My 2007 book, Wise Investing Made Simple: Larry Swedroe’s Tales to Enrich Your Future, contained 27 tales to educate investors about important investment concepts and strategies. This article is in the spirit of those tales.
If beating the market was as easy as becoming a top tennis player, there would be a lot more Serena Williams and Roger Federers. The lessons of acquiring skill in tennis are crucial for investors to heed.
It is well-established that “lottery” stocks – those offering the potential for outsized returns, like penny and growth stocks – deliver poor performance. While one might expect that naïve, retail investors are the ones buying those stocks, new research shows that is not the case.
Every January, I start keeping track of the predictions for the upcoming year I hear in the financial media and from advisors and investors. With the arrival of the fourth quarter, it’s time for my third review of how those forecasts played out.
Sports betting and financial markets have a lot in common. The wisdom of the crowd is setting prices and the markets are highly efficient, making it difficult to outperform.
In investing, as in fashion, fluctuations in attitudes spread widely without any apparent logic.
Investors underestimate the negative consequences of high environmental, social and governance (ESG) risks, and underreact to prior negative ESG events. High ESG risks destroy shareholder value.
New research disproves a pearl of conventional wisdom – that a move to a democratic form of government is good for investors in that country.
Research based on Morningstar’s “globe” ratings, which measure a fund’s adherence to ESG standards, shows that most conventional funds indeed prioritize sustainability in their mandates, and that highly rated, five-globe funds don’t perform any better than one-globe funds.
The data used to measure a company’s compliance with ESG guidelines is inconsistent and leads to misleading results. Moreover, when teams at the same company manage comparable ESG and non-ESG funds, the former more often underperforms the latter.
Active managers persistently lag the returns of benchmarks and index funds that track them, with the excuses for underperformance recycled every year. We are going to discuss a book, The Incredible Shrinking Alpha, which is the antidote for the active managers’ siren song. It will reinforce your commitment to indexing or systematic investing, while increasing your knowledge. Larry Swedroe, my guest today, and Andrew Berkin, are co-authors of The Incredible Shrinking Alpha, the second edition of which has just been released.
Assessing a company’s ESG behavior is a qualitative, subjective undertaking. New studies show that the major firms that issue ESG “ratings” use sufficiently different criteria, which results in unreliable research findings when their databases are used.
Factor-driven investing, while highly popular among equity investors, has not been as widely adopted in the bond market. But research shows that a factor-based approach to bond investing is superior to attempting to identify top-performing active bond managers.
Non-profit endowments, particularly those of elite academic institutions, have failed to deliver investment outperformance. Those colleges and universities have significantly underperformed a passive benchmark on an absolute and risk-adjusted basis.
One explanation for the underperformance of the value factor has been that the growing importance of intangibles, and the failure of the accounting system to record their value on financial statements, renders value measures anchored to current financial statements, such as book value, useless. New research shows how to address this failure.
Americans are working longer for financial reasons – they can’t afford to retire. But what few realize are the enormous economic and social benefits that accrue to those workers and the companies they serve.
Investors have no chance of adding alpha by pursuing an “endowment” model. New research shows that even the most sophisticated institutions do worse when they increase exposure to alternative asset classes, and that investors would be better served with a passive, 60/40 allocation.
How would Buffett be viewed if, instead of being the chairman of Berkshire Hathaway, he ran an open-end mutual fund by the same name?
Investors have no chance of adding alpha by pursuing an “endowment” model. New research shows that even the most sophisticated institutions do worse when they increase exposure to alternative asset classes.
Large-scale studies have shown that actively managed funds underperform their passive benchmarks on an absolute basis. New research shows that this is also true on a risk-adjusted basis – and this is true across asset classes and sub-classes.
The recent poor performance of value funds has led some investors to illogically shift to products with less exposure to the value factor. The evidence that the value factor has worked over long periods of time means you want more exposure to it, not less.
